Hello, and welcome to the Morningstar series "Why Should I Invest With You?"
I'm Emma Wall and I'm joined today by Blake Crawford, Portfolio Manager for the JP Morgan
Europe Dynamic Ex-UK Fund.
Hello.
Hi.
So, this is the week that Draghi's corporate bond buying policy begins.
What is the idea behind this?
What is he hoping from this?
So, I think if we cast our mind back to March the 10th, Draghi announced a number of initiatives
with the ECB and one of them being an extension of the asset purchase program to include investment-grade
corporate bonds into the remit and the idea was just to try and help stimulate the European
Economy to help it recover and we think it really is going to have a number of effects.
There are two effects in particular.
The first one is by buying up these investment-grade corporate bonds what it's doing is reducing
the yields of these bonds which is essentially the cost of borrowing for these corporates.
So, what we had before was something where it was happening in an indirect manner through
these sovereign bond yields.
Now, we're seeing it directly impacting the cost of borrowing for these corporates which
hopefully will then feed through into cheaper cost of borrowing and hopefully feed through
into an increased spending from these corporates which will increase the money supply and track
on to GDP.
The second impact that it has is, obviously, they are able to not only buy in the primary
market but also secondary market.
So, what that would do is they will give money to existing bond holders and that will place
cash in the hands of these existing bond holders who then can go out there, they could go out
and spend this one goods and services or spend it on other assets and that's really going
to help, again, increase the money supply and which tracks on nicely to GDP.
I think one of the consequences that people often overlook though is some of the key holders
of these bonds are insurance companies and banks and I think what you're going to see
is, as we see these negative yields, especially in the sovereign space, starts to fall and
go lower, what it means is that these insurance companies and banks might decide, you know
what, we want to hunt for a higher yield.
We might go into potentially European corporates or the more risky assets, such as equities,
which provide a nice strong stable dividend yield.
So, then as you've just said, on the face of it, it looks like this policy is only going
to affect the bond markets, but actually it's going to have an effect on across asset classes
and in turn hopefully boost stock markets.
Yeah.
I mean, I think that's our expectation.
And obviously, not just through potential buying of dividend-yielding stocks but also
through this recovery, through this GDP recovery that we're seeing we're expecting to see the
European economy in general recover, unemployment fall.
We're expecting to see some GDP increase and that should feed through into some of the
cyclical areas of the economy.
What a lot of people say is this is a sort of a beginner's guide to the recovery post
global recession that the U.S. led the way and then sort of two years behind was the
U.K. and two years behind that was the Eurozone recovery.
So, now, at what point in this cycle are we with the Eurozone recovery?
And at this point, what sort of sectors should we expect to be doing well?
Yeah.
I think it's very difficult to say exactly where we are in the economic recovery and
it's something that I think when we look back we thought it would be easier to ascertain
exactly where we were.
From my perspective and from our perspective in the JP Morgan, we're very much looking
at these cyclical stocks because we're seeing this recovery, seeing this pickup in data,
whether it would be the PMI showing expansionary territory, whether it would be unemployment
falling, or whether it would be GDP looking like it's going to start to increase.
So, we very much like to have exposure to these cyclical companies.
And one sector in particular that we're liking at the moment is the transportation sector.
So, we're looking at names like Vinci in France and DFDS in Denmark.
And Vinci is a company that has exposure to the construction sector, but also concessions.
So, it operates toll roads in France and what we're seeing is as the economic recovery starts
to take pace, we're seeing this increase in traffic statistics, increase in number of
cars on the roads and that's really feeding through into earnings at the lower level and
that's driving these earnings upgrades and the share price performance.
If we then focus now on DFDS, this is a ferry operator in Denmark.
It does freights but also passenger ferries and as consumers are feeling a little bit
more confident about the economic recovery, that's really feeding through into increased
demand and this is a company at the moment is benefiting from consolidation in the sector
which is really improving the pricing outlook.
So, we've got there a company that delivers a huge free cash flow yield of around 8% to
10%.
It's a company that is trading on 13 times price to earnings multiple and it's a company
that offers double-digit earnings growth.
So, all the kind of things that we're looking for in an investment.
Blake, thank you very much.
Thanks very much.
This is Emma Wall for Morningstar.
Thank you for watching.